At Foxley Kingham, we advise businesses and individuals day-in-day-out on their finances, as you would expect a chartered accountant to do.
All the ideas in this series of articles ultimately revolve around four basic insights about growing a business. You can:
- Increase the number of customers
- Increase the number of times each one does business with you
- Increase the average value of each transaction
- Increase your effectiveness and efficiency
Here are some other business principles that we will explore later in the series:
- What you can measure you can manage
- Build in unique core differentiators and focus on them constantly – it’s more important to be different than it is to be better
- Cutting the price is always an option but there is usually a better way – increasing the value
- Break compromises and lower the barriers to people doing business with you
- Systemise every aspect of your business
- Empower your team to make it right for every customer
- Create a clear and detailed action plan
*We have chosen to use the term customer throughout the article while recognising that many professional businesses may prefer the term client. We use the terms synonymously.
1 . Write a business plan
Planning is a key element to running a successful business. To get where you want to go, you’ll need a business plan. Start with a simple plan that pinpoints what you want to achieve. Here’s an example:
- In five years, I want the business to be worth £5 million
- To achieve this, it must make annual profits of at least £1.5 million
- To achieve this, it must have sales of £10 million
- I need to increase my sales by, on average, £1 million a year
- To do this, I will need to:
- Increase my customer base by 15%
- Increase the number of times my customers buy from me by 20%
- Raise prices by 10%
Having developed a basic plan, it’s time to identify the constraints you think may get in the way of successful implementation. Consider the following:
Inside the business, what are the principal constraints on our growth? Some possibilities:
- Lack of capital (financing)
- Lack of credit from suppliers
- Too many customers owing you money
- Underperforming owners/attitude issues
- Underperforming staff/attitude issues
- Internal conflicts
- Lack of direction
- Outdated technology
- Lack of marketing
- Missing skills
- Retirement and succession issues
- Undesirable customers
- Excessive payroll
- High occupancy costs
Outside the business, what are the principal constraints on our growth?
- The economy
- Energy prices
- Shipping costs
What you should find is that you can’t do much about the outside constraints but you can do a lot about internal constraints.
- Develop targets, forecasts and budgets
Once you have a business plan, move on to setting targets for the short and medium-term. Do this together with your team, making sure everyone understands them and how they will be achieved. Then make sure everyone agrees that they are achievable. If your team isn’t willing to agree on this, go back to the drawing board.
Next, it’s time to draft financial forecasts for the same periods. There’s a temptation to do these just to satisfy some outside party such as a lender, but they are a key management tool. Highlighting deviations from forecasted numbers allows you to take corrective action more quickly. Your forecasts are dependent on assumptions and estimates, so here it is important to be conservative.
The last step in the process is to put together your near-term budgets. This is where team input is critical.
Build budgets from the ground up, i.e. “here are our objectives, how much do you think we need to budget to achieve them?” rather than “here’s your budget!”
- Track your key performance indicators
Key performance indicators (KPIs) are the statistics you track to determine how well your business is doing. If you’ve been running your business for a long time, you will probably have developed your own KPIs, even if only on an informal basis. We think there’s merit in formalising your KPIs and setting up a system to measure and report them regularly; in fact, many companies do them daily.
The first KPI we usually think of is net profit and its components: sales, cost of products and/or services sold and operating expenses. While this information is certainly interesting, it’s not much help in running the business. The information is historical and may not be available until long after the measurement period.
So let’s look at some alternative KPIs:
We need to track sales constantly. In most enterprises, sales should be tracked on a daily basis with week-to-date, month-to-date and year-to-date information. The main value derives from comparing your sales against budget and prior periods.
“Cash is King”, so you will want to track your cash balances, your accounts receivable and your collections. You will also want to keep track of your payables. The following is a simple table we have devised for several of our customers, with a report generated at least once a week (although preferably more often):
Start of the Day
End of the day
Here are some KPIs that apply to most businesses; please remember that KPIs are generally specific to a particular business or industry:
- Sales revenue
- Number of sales transactions
- Average sales transaction value
- Cost of goods sold
- Gross margin %
- Number of new customers
- Average sales per team member
- Average salary costs per team member
- Average salary costs as a percentage of sales
- Sales income per day
Distribute your KPI information to everyone on the team.
There you have it, the first three key ideas of 14 we will bring you in a series of articles aimed to help you grow your business. In the meantime, don’t forget your Foxley Kingham account manager is always on hand to soundboard ideas, business finance is far-reaching and often, the advice we give touches on many other areas of a business’s operation. As a consequence of this and our many years of work and experience, we have gained knowledge about business growth, opportunity, and even mindset. And, crucially, what works and what doesn’t, particularly when it comes to strategies for business growth. You can always pick up the phone for a free consultation.